2 Companies Alibaba Might Buy With Its Mountain Of Cash

All the world is abuzz over the Alibaba (NYSE: BABA ) initial public offering last Friday. The company came to the market with the largest IPO in history -- raising $25 billion from the sale of shares.

I haven't seen this much fanfare since the Facebook (Nasdaq: FB ) IPO and we all know what happened with shares of the social networking platform. The stock plummeted more than 50% from its first trading days until the company could prove its monetary worth.

No doubt Wall Street will provide innumerable price targets for shares of Alibaba and the stock could surge as investors vie for a piece of the Chinese e-commerce marketplace.

There are 302 million internet shoppers in China, nearly equal to the entire population of the United States, and the company's F-1 SEC filing shows 279 million active buyers as of June. The company has grown mobile revenue by 923% and facilitated the sale of $296 billion in merchandise over the last year.

Despite the huge growth awaiting the company, shares of Alibaba may not be where the real money will be made.

Beyond the nearly $22 billion in IPO funds, Alibaba will have easy access to debt as a public company and some analysts are projecting a capital raise of as much as $50 billion . While the rest of the market is salivating over shares of the Chinese internet behemoth, you should be thinking about what they are going to do with all that money.

While the world is focused on Chinese growth, the company already has some strong assets in the domestic market. Taobao is china's largest online shopping destination with the country's most popular mobile commerce app. Alibaba also owns 1688.com, a leading online wholesale marketplace, AliExpress and several other wholesale and retail marketplace sites.

On the other hand, international commerce accounted for just 12% of the company's $34.5 billion revenue in 2013, much of which was still connected with the domestic market through the buyer or seller. While Alibaba is sure to see strong growth in its own market, if it wants to be a global e-commerce leader, it will have to expand into other markets.

And I have found two acquisition targets that could help Alibaba address its biggest weakness: international sales.

Growth and Market Size with Two Acquisitions

MercadoLibre (Nasdaq: MELI ) is the largest e-commerce platform in Latin America operating in 13 countries and is the top e-commerce website by visitors in seven of those markets.

The company represents a market of over 550 million people within a region that has one of the world's fastest-growing internet penetration rates. Revenue grew at a 19% annual pace over the last three years and e-commerce in Latin America has increased at a compound rate of 15.5% over the last five years. Higher disposable income in the emerging world, especially Latin America, offers a market that Alibaba may not be able to pass up.

Shares trade relatively expensively at 38 times earnings, but that may not be a factor on strong growth and a market cap of just $5 billion. An acquisition would also bring MercadoLibre's payment processing platform MercadoPago, which accounts for 17% of revenue and would help diversify from the highly regulated AliPay.

Alibaba gets strong growth with a MercadoLibre acquisition but still lacks a foreign market with any size. Overstock.com (Nasdaq: OSTK ) operates an online retail platform that could give Alibaba its entry into the huge U.S. market for an incredibly cheap price.

E-commerce sales in the United States increased 15.7% in the second quarter and topped $283 billion over the last year. This represents just 6.4% of total retail sales and a market Alibaba cannot ignore, even against higher competition. Shares of Overstock.com have nearly halved from their 52-week high in 2013 and trade for just 5.2 times trailing earnings. The drop in the shares is in stark contrast to a 9% annual growth in revenue over the last three years and a surge in operational cash flow over the period.

The company has no long-term debt and $150 million in cash on the balance sheet. The $431 million market cap would be a drop in the bucket for Alibaba and a quick entry into the world's largest economy. Fairfax Financial holds 13.25% of the shares along with several other private equity firms that may push to unlock value with a sale.

Risks to Consider: Investing solely on the hope of an acquisition is risky and you will want to limit the amount of money in the shares. Even without a buyout, both companies have strong fundamentals and good position in a growing industry.

Action to Take --> Alibaba is coming to market with a mountain of cash and will be looking to deploy it in strategic acquisitions. Both MercadoLibre and Overstock.com offer strong assets in regions where the company has relatively little exposure, which could prove beneficial to investors who get in before a potential acquisition.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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